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solve step by step 10. PQR Enterprises has assets of Rs. 20 crores financed by 1 crore equity shares of Rs. 20 each. The equity
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10. PQR Enterprises has assets of Rs. 20 crores financed by 1 crore equity shares of Rs. 20 each. The equity shares are currently being sold at par and the firm is considering to retire some of the shares with borrowed funds, which it can obtain at an interest rate of 15\%. The expected EBIT (tax rate 50\%) for the next year is Rs. 5 crores. a. What would be the effect on expected EPS and Return on equity and why? b. The firm is considering two alternative leverage ratios of 25% debt and 50% debt to total assets. Find out the expected EPS and Return on equity for both the leverage ratios. c. In a bad year, the EBIT of the firm may fall to Rs. 2 crores and in a good year it may go even up to Rs. 8 crores. Find out the EPS and expected Return on equity for both the levels of EBIT and the leverate ratio of 25% and 50%Step by Step Solution
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